That was the general reaction to the latest UCLA Anderson economic forecast predicting “very sluggish growth” for a slowly recovering economy into the 2012 election season. The forecast for California was no better saying it would be a long, slow, slog to gain back the 1.3 million jobs lost in the recession let alone generate growth beyond that loss. UCLA forecast the national unemployment rate will be 9.7 percent by 2010 year-end and 9.5 percent in 2011. For California today’s 12.6% unemployment rate is expected to fall slowly and average 12.2% for 2010, but will not fall below double digits until 2012.
Remember, if voters approve Proposition 23 in the Fall 2010 election, California’s AB32 Global Warming Solutions Act would be suspended until unemployment falls below 5.5% for four consecutive quarters. You can bet its proponents will be campaigning for the measure saying California’s AB32 is a “jobs killer”.
UCLA senior economist David Shulman said there were two reasons for the slow recovery.
- Our Economic Balance Sheet is a Mess. The UCLA “balance-sheet hypothesis” done two years ago, is similar to the University of Maryland and Harvard University results finding that” recoveries from the bursting of debt-fueled financial bubbles are invariably slow and are associated with high unemployment rates and rising government debt.” Meaning quick recovery is not likely.
- Too Much Policy and Tax Uncertainty. “The recovery is being exacerbated by an extraordinary increase in policy uncertainty, which is amplifying the usual economic uncertainties associated with recessions.” So businesses are unsure that investment, new hiring or purchasing new equipment makes sense given the uncertainty over tax rates, and the looming costs for new environmental, energy, financial, labor and health care policies the Government is imposing.
“As time passes the economy will naturally heal and the policy uncertainties will resolve themselves to allow growth to return to a 3% path, causing unemployment to begin a long-awaited downward trajectory. We forecast that these more ebullient trends will become noticeable by 2012.” —-David Shuman, Senior Economist, UCLA Anderson Forecast
Uncertainty has a way of sapping our confidence leaving us with that ‘deer in the headlights’ feeling that discourages the very actions most needed to break the cycle. The economy needs to grow again to pull the US back into sustainable growth mode. But the actions of the government are having the opposite effect and every day consumers are receiving rising health care premium notices, notices of changes in bank fees and credit terms, reports of dismal housing sales and falling home values even at record low rates—and then there is the unemployment rate looming over us like a falling sword.
The result is a TEA party where the punch is spiked, the crowd is surly and the politicians are running for the exits or being thrown out by the crowd. While the results of the 2010 election season are increasingly the sum of the fears of incumbent politicians in both parties, the change it is bringing helps to turn our civic attitude from uncertainty to empowerment once again and this is good.
The genius of America has always been our ability to adapt and change—to reinvent ourselves, to live into our future rather than be shackled to our past. What we’re proving to ourselves all over again is we still can do it.
Change WE can believe in is turning our uncertainty into certain action, not necessarily the way our leaders want, but the way we want to put America back to work.
YES, We Can!
As we approach midyear, 2010 is turning out to be both a good year and a bad year for the clean energy crowd. There is soul searching, consternation and inspiration taking place all at once around the world today as the global aspirations for the clean energy economy and a massive response to fears of climate change confront the realities of the great recession, climategate, looming deficits and dreaded inflation.
The world is emerging from the great recession taking stock of the impacts and dealing with the aftermath. In that context, the Pew Charitable Trusts released its report on the clean energy economy as a follow-up to the recent meeting of the G-20 leaders. You can find it here.
Once you get past the political correctness, pandering and the “America is falling behind” spin because we did not pass cap and trade, sign off on COP15 or apologize enough for other sins, it isn’t a bad read.
I would highlight the following points from the report:
- Global Clean Energy Economy is Growing. Clean energy investments in G-20 nations grew 230% from 2005 to 2009. Despite a retreat of 6.6% during the worst of the recession, there are $162 billion in continued investment in 2009 and it is expected to grow in 2010 by $200 billion.
- Despite COP15 Cop-out, BRIC Countries Stepped Up Clean Energy Spending except for Russia (does that make it the BIC countries?) signaling durability for the clean energy economy.
- USA led the world in renewable energy capacity at 53.4 GW, but Pew calls this falling behind the faster pace set by China, Germany, Spain and India. It conveniently fails to mention that China is tired of being beaten up for building fossil plants and its massive pollution, sees a huge export market for PV panels and wind turbines, and was vacuuming up the feed in tariff subsidies from Spain and Germany until the latter pulled the plug and cratered their own clean energy market growth which proved unsustainable without the subsidies.
- China overtakes the US in installed renewable capacity in 2010 which Pew again spins as America falling behind. Instead America’s RPS policies, tax credits and renewable investment supports are bringing America to the brink of achieving the original 20% RPS goals in many states.
- Wind is a mainstream resource in every market and solar is near mainstream as prices fall and installed capacity grows. America benefits from China driving down the price of wind turbines and PV panels to grid parity levels even if it does cause accelerated consolidation in the clean energy segment. China and the entire world benefit if expanding clean energy production in China grows its market share of renewable energy capacity—a win-win not a win-lose.
My biggest gripe with the Pew report is its pandering to the G-20 by denigrating the US. Look at page 13, for example, in the section entitled Renewable Capacity Growing Worldwide in which Pew states that the US led the world in installed capacity for wind, solar, geothermal and biomass but risks falling behind in market share growth as other countries pick up the pace. It then refers again to Spain and Germany as if they are models to emulate with their heavy, unsustainable subsidies that imploded in a FiT of economic unreality.
Celebrate Competitive Clean Energy Markets
From my vantage point, the US should celebrate the growth in clean energy investment and renewable energy market share in other countries around other world as validation that the US investment and leadership in making a market for clean energy, nurturing that market but forcing it to be economic and sustainable is a better model than the socialized approach used in Germany and Spain, for example.
So what does this rant have to do with Main Street you ask?
Read the recent story in the Sacramento Bee about how vineyards in Napa Valley and farmers in the great Central Valley of California are adapting to this clean energy economy. Deprived of enough water to grow their crops by court decisions, environmental restrictions and a disinterested (except in election years) Federal Government some are turning to harvesting energy from their land to stay in business.
Mark Glover’s story in the Bee May 1st is a case in point. The Sutter Basin Growers Cooperative, made up of 125 Northern California rice and bean growers recently dedicated a five acre solar farm of 11,922 PV modules near Sacramento. The 864kw plant has been in service since March and powers rice and bean dryers during the co-op’s peak harvest season and the peak power season too from September to November and net meters its energy back to the utility grid when not being used by the farmers. It is part of a strategy to reduce the cost of operations. That it also helps the environment is good news, but the more important goal is to help the farmers survive. The project is expected to cut the farms’ energy costs 80 percent, or $226,615 the first year.
The $4.5 million project cost was defrayed by state and federal solar tax incentives and other utility credits. Sutter Basin Coop financed the project through a lease from the Farm Credit System, with an option to purchase it outright after 10 years. This project is one of about a dozen agriculture-related solar projects installed in the Central Valley in recent years, according to Glover’s story.
America’s Main Street clean energy story is about the bottom line
Germany and Spain bought market share by heavy subsidies and feed in tariffs that were not sustainable. China used those subsidies to undermine the German and Spanish policy by vacuuming up the subsidies to buy cheaper wind turbines and PV panels instead of the work going to German and Spanish companies as the government expected.
Yes, we have some of that here too. Remember Senator Schumer of New York wailing that the Federal Stimulus money for renewables was being used to buy cheaper Chinese turbines and panels? Schumer’s union friends demanded a “buy American” policy quid pro quo but that violates virtually every trade deal we have ever signed. China is growing market share largely because its command and control economy enables it to make decisions quickly and execute them for competitive advantage. This is useful but not always lasting.
America’s sustainable defense in the global clean energy economy is competitiveness.
When deals make sense at the bottom line instead of the political contributions line they are sustainable. And guess what else the Pew report failed to mention?
America is the hottest market in the world AGAIN for clean energy investment. Why? Because our markets are open, our business is transparent, corruption is low, the contracts are safe and enforceable, and the deals work because they are sanity checked every day, every quarter, every year at the bottom line by investors.
Now that’s what I call sustainability!
This is part of an occasional series looking for signposts of our energy future. It is not a forecast or a prediction, but a search for clues about the path we seem to be following to meet our energy needs. I also included a few bumps in the road.
Feel free to add your own signposts to this non-exhaustive list.
Signposts of our Energy Future
- Unconventional Gas is a 100 Year Winner! The steady growth of natural gas supply from unconventional sources like shale plays across North America is real and sustainable. That was the clear message from speakers at the IHS CERAweek conference in Houston. Jim Mulva, CEO of ConocoPhillips told the crowd on oil day that the proved reserves of natural gas from shales has grown from 30 years to more than 100 years supply with more to come. While this is not new news it does represent a significant recognition that unconventional gas is both substantial and sustainable. Even Energy Secretary Steve Chu acknowledged that natural gas was the key to America’s energy security and a major factor in achieving any reduction in greenhouse gas emissions from coal. He told the CERA crowd that he had asked the National Petroleum Council to begin a study in Spring 2010 of the Prudent Development of North American Natural Gas and Oil Resources. So What? Expanding development of America’s domestic oil and gas resources is essential to our energy security and a key factor in restoring America’s global economic competitiveness. The potential for oil & gas from unconventional sources depends upon American technology and America’s oil and gas expertise being demonstrated in play after play across North America. Will this open the door to offshore drilling? Too soon to say. Will this be good for the environment? Yes, since natural gas has one-half the emissions impact as coal. Will gas expansion hurt wind and solar development? No, since renewables require backup to offset their intermittency. Is domestic oil and gas development good for America’s economy? DUH!!!
- Economic Recovery is Slow but seems Durable. OK, the glass is half full, but after all we’ve been through we’ll take it. Key signs of green sprouts include the sharp growth in the ISM index with industrial production up 5.3% since it bottomed out in June according to Wells Fargo Economics which also said that manufacturing jobs grew in both January and February suggesting that we have now eaten up excess inventory and suppliers are beginning to restock the shelves to meet the strengthening of consumer spending which has also been stronger than expected. Well Fargo Economics predicts real GDP growth of 3.4% in Q1:2010 but still sees slower growth by midyear. So what? So the rough spots remain stubbornly high unemployment which is always a lagging indicator and the continued problems in the housing sector. Other than that, Mrs. Lincoln how did you like the play.
- Is the Stimulus working? And do we Need it? The Administration and Democrat majority in Congress claim the $862 billion in stimulus spending approved is saving jobs and doing its job of turning the economy around. But others who are tracking the progress and problems with stimulus spending tell a different story. ProPublica reports that only $195 billion of the stimulus money has been spent with another $151 billion somewhere in process. You can read their report here. But if the Government cannot spend this stimulus money when we need it, do we really need it? And if the economy is turning around on its own BEFORE we get all this stimulus money handed out could we just save the billions not yet spent and reduce the deficit?
- Renewable Energy Market Share is Growing but So are Rates. We continue to see major expansion of the market share of wind and solar power generation across America driven by the state renewable portfolio standards. But this massive growth has only raised the total installed capacity of renewables to something like 9% but not even this fast growth is sufficient to materially affect the market share of coal and certainly will not do so cost effectively. So what? Utility rates are programmed to rise dramatically as the above market cost of renewable energy is factored into rates on top of the costs for emissions reduction and smart meters. And guess what, it won’t be sufficient to meet our growth in energy demand in a recovering market. OUCH!
- Electric Demand is Returning to Historic Levels—will that mean shortages ahead? The US EIA short term forecast for U.S. Electricity Consumption assumes 5.5% growth in manufacturing output during 2010 which means an expected growth in electricity sales to the industrial sector of about 1%. EIA forecasts electricity sales to the residential sector to grow by 3.5% during 2010 assuming normal weather. Total consumption of electricity across all sectors is expected to grow by 2.0% during 2010 and by 1.5% in 2011.  So what? These are signs that we are in the build up stage of the next electric boom and bust cycle and one signpost of that stage is perceived and real constraints on power generation. States have favored renewable energy for most new power generation additions and many, many coal plants have been cancelled or deferred in the face of uncertain cap and trade regulation. The Obama team has supported one new nuclear power plant project. We have reduced our lead time for power plant construction and a return to historic demand levels for power means that the only practical choice to quickly catch up to demand will be to build natural gas combined cycle plants. Got gas?
- US is not Serious About Electric Transmission. The failure of US DOE to release the 2009 Electric Transmission Congestion Study due to Congress last September is a clear signpost that the US is not ready to face up to the need to take substantial actions to upgrade and expand the interstate transmission system essential to bring new renewable energy projects to market and enable smart grid investment to be practicable. Problems are likely political given the historic conflict between the States and Federal Government over control of transmission siting. So what? NIMBY wins! Smart grid requires broad market access to make the networks and efficiency and demand response programs scalable. Without transmission access new renewable solar in the Southwest and wind in Texas, Iowa and elsewhere cannot reach the load centers. Federal preemption of the states in building natural gas pipelines has created a common market across North America for gas that is serving us well. The fragmented state by state approach to electric transmission is holding us back and undermining our investment in smart grid and renewables.
- Ratepayer Tea Parties Ahead. There is a looming problem of rising utility rates brought on by the pancaking costs of state renewable portfolio standards, feed-in-tariffs and other procurement subsidies, the cost of emissions reduction especially AB 32 in California, and the rolled in costs of smart meter installation. So what? So expect ratepayers to start coming to the street with signs when their rates double or triple over the next five years as a consequence of the political aspirations of politicians and regulators who have approved all these programs. Polls show that ratepayers do not see this coming and it is likely to hit the fan BIG TIME before the economic recovery fully takes hold.
May You Live in Interesting Times
Peering into our energy future always reflects the volatility and surprises that characterize the energy business. Add that to the natural boom and bust cycles of the business and you find a frothy stew simmering and ready to boil over.
The good news is we have more choices today given the growth in unconventional natural gas that reduces our dependence on imported LNG and turns upside down the once forecast transformation of our domestic gas market into a global gas dependence on the same countries that send us oil.
The other good news is the growth in clean and renewable energy from wind and solar and the exploding global demand that is bringing China and its low cost manufacturing prowess to bear driving down the equipment costs for wind turbines and solar panels. If some of the stimulus money allocated to energy ends up in China because we bought their renewable equipment it is a good sign that the Chinese are our friends because they are committed to driving down the cost of renewable energy to grid parity prices in order to capture market share for exports.
When they do that we can end the subsidies of wind and solar and force them to compete on a level playing field with natural gas and clean coal—and let the competitive markets work!
Now that’s an energy future worth working to achieve!
The Western Climate Initiative partners meeting is being held March 3rd in Vancouver BC, but there won’t be much cheering in the stands after Arizona Governor Jan Brewer issued an executive order officially pulling Arizona’s commitment to reduce greenhouse gas emissions to reduce emissions to 15 percent below 2005 levels by 2020 as part of the cap-and-trade approach the Western States and Provinces agreed to in 2008. 
Back then the Federal Government under President Bush resisted action on cap and trade and WCI was seen as a politically correct strategy for encouraging collaborative action along the lines the Northeastern States had taken earlier in forming RGGI—the Regional Greenhouse Gas Initiative. Fast forward to the November 2008 election of Barack Obama and the Feds shifted their strategy and Waxman-Markey Cap and Trade legislation began rolling as a prelude to the main event which was to be a new global treaty at Copenhagen’s COP15-fest.
We’re Behind You California—Way Behind You!
That is the headline to the story of the WCI today, but despite having ten remaining WCI members only the Golden State—now out of gold—is the only one of the WGI partners actually moving forward. In November 2009, the California Air Resources Board issued a preliminary draft regulation for its AB32 Global Warming Solutions Act implementation. 
The recession has had a sobering effect on all these partners and was the official reason for Governor Brewer’s executive order in Arizona. She said the cap and trade program would “devastate Arizona’s economy” and instead the state would use nuclear, solar and other renewable energy sources. But that was true before the recession except Janet Napolitano was Governor then moved on to be Homeland Security Secretary to President Obama.
Indeed, there was an embarrassing dust up recently when one Arizona legislator filed a bill to reclassify energy from the Palo Verde nuclear plant toward meeting the State’s renewable portfolio standard goals thus effectively ending the program by achieving its goal. While the bill was later withdrawn after howls of protest by the solar lobby the point had been made.
The problem for California is that it is now committed to implement AB32 by law. But the cold reality of achieving the policy objectives of AB32 will require natural gas prices of $13.87 per mmbtu and a carbon tax of $100 per tonne in order for the cap and trade program envisioned to be effective in changing behaviors enough to actually achieve the goals according to the CPUC and the CEC—the state agencies responsible for implementing it. And we’ll need to invest billions in new transmission lines to bring all that clean and renewable energy from Arizona to the Golden State—only one problem, we don’t have any gold to pay for it.
There is a growing body of anecdotal evidence to suggest we may be at the crest of the smart grid wave and key players are beginning to map out an exit strategy. They are not yet running toward the exits but there is a sense that time may not necessarily be their ally so the pace is quickening.
Smart grid hype was born out of the global warming movement in the belief that improved efficiency in the use of electric power would result in easier access for clean and renewable energy from wind and solar, fewer line losses or wasted power, and better grid management. And there is some truth to these beliefs since the transmission segment of the electric power value chain has been the most neglected. It has always been tough to build transmission lines because of NIMBY problems so smart grid became a way of wrapping transmission expansion in a political correctness that might make it more acceptable. After all, getting that wind energy from West Texas, Wyoming and Iowa to the load centers that need it most requires transmission. Likewise, unleashing the solar potential of Arizona and the Mohave Desert to bring that clean energy to Los Angeles meant investing in wires as well as solar panels.
The excitement over smart grid was fed by the seduction of billions of Government, venture capital and utility investment in smart grid technology. And it has now produced deal flow sufficient to accelerate installation of smart meters, sensors, boxes and the networks needed to live into the cleantech potential it promises.
So why—-when smart grid potential is reaching its peak is this first wave of investors in smart grid looking for ways to cash in or cash out?
Signposts of the Smart Grid End Game Taking Shape?
- Cleantech Investors were in it for the flip. Many of these early Silicon Valley cleantech investors are not “true believers”. They saw cleantech as a profitable way of aligning the market and politicians to cash in on the global warming concerns. Just like Al Gore, these players looked for ways to make money on our fears and pain points. Seed money produced a wide range of start-ups all across the cleantech value chain leveraging the networks, software, gadgets and chips that made Silicon Valley famous. More importantly, it created a global market for the innovative technology America does best and united it with the low cost manufacturing efficiency of China and the social welfare tendencies of Europe “juiced” by the EU fear being dependent upon Russian gas. Obama became the darling of Silicon Valley because he proved willing to spend our money pursuing a policy regime that enlarged the Government’s industrial policy and social engineering—and paid off for Silicon Valley. But now it’s time to put lipstick on this pig and flip it. So Silver Spring Networks is talking about IPO? Consolidations from M&A is speeding up as smaller weaker players are acquired by stronger ones. This is happening sooner than expected but the return on investment is sufficient to do well by having “done good” before the risk erodes the value peak.
- Risks for Smart Grid Investor are Rising. The dirty little secret of smart grid is that all that investment in smart meters, networks, sensors and gadgets is meaningless unless state regulators and politicians do two things they are loathe to do—raise rates and build transmission lines. Since ratepayers are charged based upon average cost based rates they have little incentive and even less ability to influence demand on the system. Smart grid technology works by using real-time pricing so that customers, being exposed to the volatility and high costs of on-peak power change their behaviors and reduce demand. Smart grid technology taken together is well suited for this, but customers are not ready for it and politicians see it as something to consider—in the future. As a result we get all the embedding costs of adding smart meters and none of the benefits. Add to that the need to build new transmission to bring that clean wind and solar power to load centers and costs are going up—and so are rates. Not a good set of facts for investors seeking to monetize their start-up investments so it might just speed up the exit for many.
- Ratepayers are angry over rising utility rates. The cumulative cost of all this “do-gooding” is beginning to hit the utility bills just when ratepayers can least afford it. The result is pushback by ratepayers, complaints to politicians and pressure on utility regulators. But it is too late. The costs of years of procurement of cleaner, but more expensive renewable energy is coming due. The rate impacts of program after program of energy efficiency, demand response, subsidies and feed-in-tariffs paying above market costs to get cleaner energy resources built is going into rates. In California, PG&E gets pushback in Bakersfield over high utility bills and politicians run for cover. In Colorado, Xcel Energy does “good” by sponsoring Smart Grid City but when the cost go up—way up, the Colorado regulators slap it with a prudency review and threat of disallowance. In Florida, the Public Service Commission denies most of FPL and Progress Energy’s rate increases and both utilities respond by slashing capital investment and thousands of jobs. It’s getting ugly out there in ratepayer city—and the worse is still to come.
- We Told You It Would be Expensive! The age old process of CYA is setting in big time across the smart grid landscape. In Spain and Germany, the use of feed-in-tariffs to pay above market costs for solar energy imploded in the recession and the governments decided they could no longer afford the subsidies. The action in Spain pulling back on the FiT caused worldwide chaos in the solar PV panel supply chain as Spanish vendors dumped panels at less than cost to avoid being stuck with them sending PV prices around the world plummeting. The lesson: what lives on unsustainable subsidies cannot be sustained when they dry up. Now in the US there are growing concerns that utility investment in smart grid especially smart meters may turn out to be a poor one since the prospect of real-time pricing diminishing at the same pace as the rise of ratepayer squealing about rate increases. The same is true of other global warming “solutions” where in California the implementation of AB32 remedies to reduce emissions are likely not cost effective unless the market price of natural gas rises to $13.87 per mmbtu and a carbon tax of $100 per tonne is imposed according to the state agencies responsible for implementing this law. Even in California we have limits.
- Settled Science is, perhaps, Not So Settled after all. The meltdown of the Copenhagen COP15 climate change treaty process is only one of the problems plaguing the proponents of global warming solutions. The IPCC panel scandals over research manipulation has destroyed the credibility of the foundation for smart grid, AB32 like draconian measures to reduce emissions, real-time pricing and perhaps even renewable portfolio standards for clean energy by the time it runs its course. I am not cheering this on, just stating the reality that the implosion of the scientific basis underpinning all this hype on global warming and smart grid or clean energy solutions tarnishes these strategies in the face of their staggering cost. Perhaps, we do have time to find more balanced, affordable, cost-effective solutions that do not require the remaking of our global economy. And besides that, unless China, India and a few other fast growing economies agree to play by the same rules there is little reason to commit economic suicide to pursue a policy prescription that will not work to reduce emissions.
So the pendulum is swinging back and a sense of balance, proportionate response, and re-examination of the facts and science is likely to save us from our own political folly—this time. Cleantech investments will produce a rush of new products that the natural process of consolidation and flip will combine into better solutions. Subsidies and stimulus will give way to economic rationalism once again. The aftermath of the recession will have purged our economy of its unrealistic leverage and our next few rounds of elections in the US and EU body politic will purge incumbents and relieve the pressure of excessive spending—we hope.
Investors in cleantech and otherwise will do what they do best—harvest profits and move on to the next big thing. And their investment in smart grid may yet be realized—not thru stimulus or subsidies but by leveraging the convergence of information technology, communications, entertainment, security and, yes—energy management to create the next generation of ‘must have’ and oh so cool products we will gladly spend money to acquire and use. Look around you, it is already at work.
Check out the latest AT&T ad for its iPhone which touts—almost in passing—the iPhone App for “did we turn off the light at home before we left?” It’s here today. Or consider the new Comcast ad for Xfinity, the next generation of bundled services with 100 mbps bandwidth for streaming TV combined with VOIP, cable TV and a menu of thousands of movies and soon apps to meet your every need.
Smart grid investment will pay off in the long run but not because we bankrupted ourselves to install them—-but because —in the nick of time—we didn’t!
It is tough love time for our politicians here on the Left Coast!
While all eyes have been on Massachusetts and the election of a Republican to fill Ted Kennedy’s Senate seat, the potential for a revolution is also shaping up on the Left Coast here in California with the same force as one of those giant Mavericks waves off Half Moon Bay the surfers dream to ride.
Senator Dianne Feinstein told supporters she would NOT run for Governor of California. No surprise, there—who in their right mind would want to be Governor? But that is part of the revolution underway. Rumors swirl each election about whether Dianne Feinstein will run for Governor. Each time she teases and then, as now, says no thanks. Why? Because being Governor is a no-win job in California. Not even the Terminator could shake things up enough to change the political dynamics so he will leave office with a $22 billion hole in the budget. So now, still unannounced but all alone, former Governor Jerry Brown, now California Attorney General, is the likely candidate for Democrats.
The race for Governor on the Republican side is also a small field with a primary fight between Meg Whitman of eBay fame and fortune and Steve Poizner, State insurance Commissioner and Silicon Valley fat cat. Poizner is far behind Whitman in the polls and fundraising and now faces the ugly problem of looking like he is actually going to do something about Anthem Blue Cross’s outrageous 39% health insurance rate hike. Memo to Steve in the bottom of the hole: Quit Digging!
This sets up an interesting contest for California’s future between Ms eBay Entrepreneur Whitman and either former Governor Moonbeam or the brash, seasoned urbane and urban reformer that Jerry Brown turned into as a very successful Mayor of Oakland for eight years. It will be an interesting race of ideas and cut throat politics. To counter Meg’s money, Democrat friends of Jerry are launching a series of attack ads on Whitman designed to tarnish her image and cast her as a brazen, scornful, hard-hearted “rich bitch” who will be no friend of the People of California. So that should be fun to watch since the Democrats own more than their share of California’s problems and turnabout is fair play.
The juicy race this time is the Senate seat of Barbara Boxer who is running scared—and she should. Strident and in-your-face has always been Senator Boxer’s style seared into our conscious by the replay of that snide clip of the Senator berating some flustered general for calling her “Mam” in a Senate hearing. She can be counted on to be a sponsor for almost every liberal or environmental cause that registers in the polls and now that advocacy for the left is haunting her. Serious polling says Barbara Boxer is in SERIOUS trouble and November could see her dumped as the country—even California—moves back to the political center or just takes revenge on all incumbents.
The race on the Republican side pits former HP CEO Carly Fiorina against former Congressman Tom Campbell who started out running for Governor and bailed out to challenge Boxer when he realized Meg Whitman could buy him many times over. Campbell represented Silicon Valley in Congress and was Dean of the Haas B School at UC Berkeley and took a leave of absence to be State Finance Director. California has sent women to the US Senate for a generation so that is not an issue, but will we send a Republican business person! Egads!
But a careful study of the political climate reveals the fundamental economic, business climate and governance problems facing the Golden State. California is a state of huge potential being strangled by its government, tax system, and political correctness gone amuck. It is time for tough love in the Golden State and we may need a fresh eyes business person with a sharp knife to do the job.
According to the Tax Foundation, California ranked 11th among the States in per capita income in 2008 with $47,706 per person compared to the national average of $44, 254. If taken separately, the California economy ranks as the 6th largest in the world, but these days it is looking a lot more like Greece!
The Golden State has great potential but it is running out of gold with a $22 billion budget deficit to solve largely because it has a very progressive income tax that depends upon a small number of wealthy people doing well in a growing stock market to fund its services. When times are good the gold rolls in and California politicians spend like there is no tomorrow. When times are bad and the gold runs out, the state borrows to play the float until the next boom. But several years in a row of declining revenue in a banking and credit crisis threaten to kill the golden goose.
California ranks 48th out of 50 states in business climate ratings, 45th in corporate tax rates, and 49th in individual income tax rates according to the Tax Foundation and its neighbor Nevada ranks #1. But not even that giant sucking sound of California business moving out of state was not enough to stave off near disaster in the Silver State when the economy and housing values tanked. It does not even buy California time since outmigration of people leaving the Golden state is also speeding up in their search for jobs, lower cost of living and a better business climate.
Thanks to Proposition 13 which capped property tax rates, California ranks 15th among the states in property taxes and falling home valuations drop tax assessments automatically. Politicians know that messing with Prop 13 is the “third rail” of politics so they have not tried it–yet. But California is a non-recourse state meaning we still face the real threat that people will give up on California’s future and throw the keys to their underwater house on the bankers table and walk out on us to start over fresh someplace else. There are still 14 other states with lower property taxes to choose.
I still believe in California and its potential for innovation and rebirth. But a little revolution every now and then is good thing as Thomas Jefferson observed at the founding of our Republic.
The recession has awakened us from our complacency. The change we had hoped for from the Obama Administration is not working out so well for California or the nation. So in Virginia, New Jersey, Massachusetts and bubbling up here in California like ‘Mt Wilshire’ in the movies things are churning. But as voters we must do more than just ‘kick the incumbent bums out’ to solve these problems—we must actually DO SOMETHING about the fundamentals and the problems they cause and discipline our future political leaders to change their behaviors. And that is the challenge facing Meg Whitman and Jerry Brown; Barbara Boxer and either Carly or Tom, and candidates up and down the San Andreas fault line.
What is your plan for California?
Why should we hire you to be our Governor or Senator?
What will you do to fix our State’s problems?
How do we know you won’t be just like the other politicians?
What must we ALL do to change the way our state is governed to live into our potential not repeat our past mistakes? That’s what we want to hear—practical solutions that work. Hmm, maybe a business person as Governor or Senator would be a good idea.
The Great Central Valley has apparently had enough of the Federal government and environmental advocates for the Delta Smelt shutting off the water spigot thus killing the agribusiness economy and threatening the water supply for Southern California.
Perhaps, I exaggerate—but not much.
The smack down this week was word from Senator Dianne Feinstein that she would attempt to insert into a must-pass bill in Congress (any bill will do) a provision to increase the water allocations for Central Valley farmers to 40% of what they got last year. This would be up from the 10% allocation they are limited to under a Federal Court injunction in a pending environmental lawsuit.
California is no stranger to water conflicts and solutions always seem to break down in the politics of advocacy on the many sides of this issue. Dianne has always had a keen interest in the water issues dating back to her time as Mayor of San Francisco when environmental groups tried several times to scale the Hetch Hetchy water system with legal and political action to restore the pristine nature of the watershed made famous by John Muir himself.
Not even liberal San Francisco would stand still for that “let them drink bottled recycled water” outrage.
Feinstein has always been the “go to” person for water issues and the rest of the California Congressional delegation generally follow her lead. Nancy Pelosi recognizing that no political good can come from getting involved in California water issues has stayed out of it. Barbara Boxer can usually be counted on to be a reliable vote for whatever the environmental advocacy groups wanted—one reason she is in DEEP TROUBLE in her re-election effort this Fall. So Dianne has always provided “adult supervision” when needed. And it looked like this is one of those times.
Governor Schwarzenegger, to his credit, had been a persistent advocate of additional water supply and water development to fix the Delta and assure adequate water supply for California’s future. His problem is the state cannot afford the $10 billion in bond projects California needs right now.
The San Francisco Chronicle reported that Feinstein decided to get involved after Stewart Resnick, owner of Kern County’s Paramount Farms, and a big time supporter of Democrats complained that “sloppy science” by federal wildlife agencies was causing farm water shortages. Last Fall, Feinstein asked the Obama administration to get the National Academy of Sciences to review the biological opinion process. 
We don’t know why Dianne decided to preemptively act. Maybe the NAS was about to tell her the opinion process was fine. Or maybe, the Central Valley farmers convinced her they were going under. Whatever the reason, her action shocked environmentalists and Democrats.
The biggest problem with the Federal and State environmental laws today is the lack of balance of environmental and other public interest factors such as the economic reasonableness of the actions taken. Federal resource agencies and environmental advocates have no fiduciary responsibility for the consequences of their advocacy and thus no incentive to resolve the issues in dispute.
Biological opinions issued to support such actions are often subject to challenge, but the defendants in the environmental litigation own the practical burden of proving them wrong. I’ve written before of my own firsthand experience negotiating a settlement of the Mokelumne River hydropower relicensing issues in the mid-1990’s. The ONLY WAY we got a settlement was for the Utility to spend whatever it took to “own the science” on the river. That meant we had to convince the Feds that were prepared to go to court to show beyond a reasonable doubt that the biological opinions issued by US Fish and Wildlife and CA Fish & Game were flawed and why. In the end, we got a settlement because the resource agencies feared the precedent of having their opinions overturned as faulty more than they worried about the habitat or biological issues on the river.
As we have seen, the public broadly supports our environmental objectives but often feels that those goals are being used to pursue political agendas without much regard for the economic costs and consequences. In this case, California’s multi-billion dollar agribusiness sector has been virtually shut down and the water supply for much of Southern California threatened by actions to prevent the Delta Smelt from being sucked into the water conveyance pumps.
Dianne may just be playing hardball to get both sides to settle. Or she may recognize that the current stalemate is doing more harm than good for everyone. Whatever the reason, her action to end the impasse is timely and wise.
The problem is we are woefully short of politicians with the good judgment and common sense of Dianne Feinstein. My senior senator is a class act.
It appears that climate science is not as settled as Al Gore professed even as late as Copenhagen. Reports of “errors” keep piling up as researchers take a fresh look at key findings and reports emanating from the international bodies and research universities most responsible for the body of literature being used to shape the world’s environmental and economic future.
“Skeptics Up, Obama Down, Cap and Trade Dead”
That was the conclusion of an ongoing series of investigative news reports in the UK on the IPCC and other research institutions linked to the UN’s Climate Change policy analysis.  Just a month ago, the panel was forced to retract is report on the rapid melting of glaciers after it was found that it could not be supported by the evidence. 
Correction Course on Political Correctness in Progress
That scientific research has been tilted toward a favored policy outcome is neither shocking nor new. That the rest of the science community tolerated this “junk science” so long is the real tragedy. This kind of passionate inquisition has been going on for centuries, but rarely has so much money been spent pursuing political correctness nor the risk of economic harm from such policy prescriptions so profound. From faster melting glaciers, to rain forest collapse to agricultural production declines in Africa, the list of dire conclusions now being shown as based upon inadequate research, suddenly unavailable data, or just unsubstantiated opinion keeps coming like a slow trickle turned into a major flow.
Exposing these “research errors” is useful and timely to be sure. We can only hope that this tilting of science for the sake of continued research funding, professional advancement and tenure, or just vanity will be exposed and the erring parties discredited. But where was “peer review” when we needed it?
As humans, we understand human failing, and can forgive it even as we discipline those who engage in it. But we expect more from our governments and our rising cynicism and trust in government has a far more lasting and corrosive effect when we discover we are being mislead on the science and then mislead by politicians about the policies proposed as a result of reading that ‘political’ science.
It is NOT about the Environment, Stupid!
It would be a mistake of equal or greater proportion for those who cheer this collapse of climate change research to take it as repudiation by the public of our collective interest in being good stewards of the planet. The environmental movement has succeeded in persuading us that we must all act responsibly, avoid unnecessary pollution, and decry actions that needlessly despoil the planet or cause harm. We still expect to leave the earth a cleaner place for our children than we found—as the cliché goes.
But something is changing in our sense of environmental responsibility.
This exposure of bad behavior by climate scientists will result in more skepticism to be sure from this experience, and a better sense of the need for balance as a consequence of the economic recession we have experienced. We still expect environmental responsibility. But our definition of environmental economics is changing to include more balance of the cost and consequences of proposed policies against the benefits of enacting them.
Is there a Good Outcome from this Bad Science?
This could mean some profound changes yet ahead in the US and around the world after the effects of this climate change “crisis” plays out through the next election cycle:
- Reality Therapy in Mexico City. Hopes for a COP15 “do-over” in Mexico City should be diminishing considerably. If anything, the next UN conference in Mexico City should be a place full of confession, repentance, remedial education and soul searching about the important of academic rigor, peer review and transparency as a foundation for re-starting the debate about the real science of climate change.
- US EPA Endangerment. US EPA must quickly back off its threatened endangerment finding before it risks having its authority in the matter gutted by an outraged Congress looking for someone to hang for this climate change embarrassment. More than Waxman-Markey has been left bleeding on the sausage making floor of Congress, the Administration now lacks the political authority to pursue the same agenda by regulatory fiat.
- The Environmental Responsibility Act. Congress should require all Federal agencies and State governments using Federal money to include in any environmental impact statement or environmental review and/or Federal rule making an analysis of the economic impact of any such proposed action and a finding, subject to judicial review, that balances such costs and benefits in the public interest. The law should also include a “loser pays” provision in environmental litigation to assure that environmental lawsuits are not used as tactics to extract settlements or pursue political agendas.
- AB32. This California law to regulate greenhouse gas emissions is actually an income redistribution tax act designed to evade the two-thirds rule on budgets and taxes in the California Legislature. It gives the California Air Resources Board the authority to set carbon taxes administratively on an annual basis. The likely consequence is that such fees will be pegged to the size of the California budget deficit and, conveniently, requires no elected official to actually vote to raise taxes. The California Energy Commission and California Public Utilities Commission have reported to the Legislature that they believe a carbon tax of $100 per tonne would be required to implement the policy goals of AB32 and the companion 33% RPS standard. The collapse of the climate science foundation for AB32 will expose it for what it is. Besides, with RGGI and EU carbon credit prices falling like a rock to about $2 per tonne, AB32 will not likely produce the revenue California politicians’ dream of anyway after the climate science is “settled”.
Maybe unsettled science is a good thing if it forces a balancing of the costs and benefits of major policy changes in environmental laws and other public policies. Voters are in a surly mood over the state of the economy and their anxiety about their own financial future. This is the kind of political climate crisis that brought us Proposition 13 in an earlier California era. Today there is no similar ‘quick fix’ for California unless we hit “reset” by authorizing one of the ballot measures being circulated today calling for a state constitutional convention. For Congress, the path to hope we can believe in is actually swifter the old fashioned way Americans love—“throw the bums out” in the November 2010 election.
Chevron announced today that it planned to restructure its money losing refinery operations to bring costs in line with profitable operations. During the last quarter of 2009, Chevron’s refining business lost a staggering $600,000 per day according to Deutsche Bank. And it was not alone, other refiners are also underwater in this most difficult of the big oil sectors. Is it little wonder why we have not seen a new refinery built in the US since 1976.
Only a few months ago we were all cussing big oil for skyrocketing gasoline prices, and indeed for a while the sector made profits. But the boom and bust character of this business often seems to defy logic as supply and demand responds to market realities.
Up the road from my home in the San Francisco Bay area is Chevron’s 100 year old Richmond, California refinery. When prices were high Chevron proposed upgrading the facility to enable it to process a wider variety of crude oils from sources around the world. All the required environmental impact studies were done revealing that the upgraded plant would improve refinery efficiency and economics while adding operating flexibility to process a wider variety of crude oils.
Not so fast said, the environmental intervener EarthJustice which filed suit in state court to force Chevron to demonstrate that processing heavier crude oil types at the upgraded plant would not harm the environment. This is the legal equivalent of the “when did you stop beating your wife” question. While this lower court decision requiring more studies is more likely than not to be overturned on appeal, it had the effect to delaying any improvements at the Richmond refinery perhaps for years.
Yesterday, the economic consequences of that delay fell upon Richmond like a major oil spill. The Richmond City Council, egged on by local environmental constituencies, had urged more studies as a strategy to press for more tax revenue out of Chevron to remove its objections. The company just said “NO!”
Chevron said it is now more likely than not to sell or close the Richmond refinery eliminating 1200 well paying jobs and millions of dollars of tax revenue and income recycling throughout the East Bay area economy.
The crude reality is the fastest way to improve refinery profits today is to close excess capacity around the world at a time when demand is down and invest in facilities that can operate more flexibly in the future as demand recovers by processing crude from many sources to make products of many types.
So the customary environmental strategy of using the courts to impose delay in hope of negotiating concessions just backfired on Richmond, California. Instead of adding more good paying jobs and seeing tax revenue grow, Richmond will need to call in the redevelopment agency.
Perhaps, Chevron can unload this white elephant on the Chinese or some other investor, who knows. One thing seems certain the new owner is not likely to be as civic minded as the folks from down the road at Chevron who gave up after a 100 years. There must be a California solution to this problem—maybe Richmond can collect all the French fry oil and turn it into unleaded!
The sting was revealed but the hook is not yet set by the January 11th exposure of a “dispute” among the 16 member California Economic Allocation Advisory Committee (EAAC) whose purpose is to figure out how to spend the money from carbon taxes envisioned by AB32, the California Global Warming Solutions Act.
The Set Up
On January 11th the EAAC presented final allocation recommendations to the State. So this is a trial balloon to see how much angst this approach stirs among the politicians, special interest groups, and seeks to avoid enraging voters before the next election. By framing this “dispute” among members, the EAAC is setting up the potential for a sting of California consumers depending upon how the rest of the process plays out.
The timeline for the rest of this process is that a final public conference call will be held in February 2010 to adopt its economic impacts report. EAAC Chair Goulder will present both reports to the California Air Resources Board February 25th. In Fall of 2010 along with the final proposed cap and trade rules, the CARB staff is expected to recommend a final allocation approach which will purport to balance EAAC recommendations and public input. This is when the hook will be set if the political will exists to do so. There is the minor problem of the November 2010 election looming and voters in California as elsewhere are growing surly.
The committee imported a Harvard environmental economics professor, Robert Stavins, director of Harvard’s Environmental Economics program, to testify that the California approach complies with the AB 32 intent and that the proposed carbon taxes should not fall heaviest on poorer people. He opined that a cap-and-dividend approach produced fewer benefits than cutting taxes on labor and capital.
The much maligned Waxman-Markey Bill passed by the US House uses most of the proceeds from sales of emissions allowances to reduce power company costs of compliance by essentially awarding them free permits to reduce the expected spike in utility rates. This approach sidelined a number of major utilities who fatalistically decided to get the best deal they could rather than be painted as obstructionists. There is a Senate bill by Senators Boxer and Kerry which is closer to the approach being used in California, but it has gone nowhere as yet on Capitol Hill.
Placing the Hook
At its January 11th meeting, the CEAAC members endorsed a “cap-and-dividend” approach which would set prices for CO2 emission allowances as a tax on producers and then use the money raised as a “dividend” to consumers to help reduce their burden of paying all those higher prices for everything that uses energy. The discussion by staff presenting ideas to the committee suggested an annual energy “dividend” for a family of four might be about $1,000.
Sounds good, right?
Not so fast, the committee was divided on whether the best way to use this pot of gold at the end of the global warming rainbow was to give it back directly to consumers or instead use it to create “tax cuts” in state income taxes or sales taxes that will have to be raised to balance the state budget!
The timing was subtle but perfect. Waxman-Markey has stalled in Congress and COP15 turned into a food fight between developed and developing countries and resulted in egg on all their faces. So California with AB32 safely adopted has the opportunity to recapture the leadership flag and show the world how things are done in the Golden State.
Meanwhile, the State is facing another $22 billion deficit because of the recession thus the convenient convergence of the need to develop an implementation plan for AB32 and address the growing California budget deficit sets up the “the sting” that should earn the State an Oscar for best supporting actor in a political drama. Nothing tops the Federal Governments hubris for spending, taxation and income redistribution for Best Actor nominees this year.
Perfect Sting or Fatal Error?
So will California use Carbon Taxes to fill the hole in its state budget? The perfect cure it seems to state politicians. Will they save the world and save their behinds at the same time all while calling these new carbon allowance revenues “dividends” or using them to “reduce taxes” that they must raise rather than reduce spending to close the budget gap? Or will this fatal attraction and sleight of hand turn into a fatal error in the November 2010 elections. High stakes!
But I saved the best part for last, his vast income redistribution scheme would not require the Legislature to actually vote for any nasty tax increases since the California Air Resources Board would administratively each year set “carbon allowance fees” sufficient to raise the revenue needed to meet the Legislature’s spending desires and balance the budget and then the Legislature would declare a “dividend” to give a modest portion of the revenue back to consumers while taking credit for being fiscally responsible balancing the budget by keeping the lion’s share for budget spending. This has the added political benefit of reducing the hostage taking behavior over the need for a 2/3 vote to raise revenue or reduce expenditures each year in passing the state budget. The debate among the 16 members of the California Economic Allocation Advisory Committee is not really what to do but how little of the revenue must be given back to consumers.